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Trade Finance/ Invoice Discounting vs. Classic Collections

Paying customers are the backbone of any company, especially small businesses. Imagine dealing with unpaid invoices for 60 to 120 days and beyond. This can stifle your business’s growth potential significantly.

You’d have to deal with suppliers that don’t understand your dilemma, which would affect your ability to buy stock. An enterprise in this position cannot operate efficiently because there’s no cash flow in the business. It also creates challenges that threaten the business’ ability to operate and expand. To protect the firm’s working capital and long-term potential, companies in this position often turn to various invoice financing solutions. In this article, we will discuss discounting/ trade finance vs classic collection methods.

Invoice Financing

Invoice financing is an ideal short-term financial solution. It works for any business that finds itself in a financial bind because of extended credit. Invoice financing comes in several forms which can help a company to continue operating while they wait for accounts receivables to be settled. The following are the different invoice financing options available to businesses:

Classic Collections:

The classic debt collection method deals with unpaid invoices that are older than 60 days. It happens when a company continues to chase payment from customers for long periods of time.

A lot of companies opt for this method even though it involves hiring a collection agency. The agency will manage the debt collection process on the company’s behalf until the customers pay. This gives the company a chance to focus solely on getting their business back on track.

On the downside, we know collection agencies for their use of aggressive methods and that may put customers off. Plus, the agency takes 25% to 30% off the invoice amount. And the company only gets paid when the customer pays through the collection agency.

This might seem like a raw deal for some but it’s better than not getting paid at all.

Invoice Discounting/Trade Finance Company:

With invoice discounting, a company goes to a financial services provider to buy operating capital. This capital offsets the problems caused by unpaid invoices while the company waits for payment.

The financial service provider “loans” the funds to the company on condition that they pay them a percentage of the invoice amount. But, that’s where the responsibility of the FSP ends. The company continues to take care of all other aspects of the business, including debt collection.

You should not confuse invoice discounting with trade finance, also known as invoice factoring. The latter involves the FSP buying the accounts receivable from the company. The invoice factoring company also takes over the collection process and liaises directly with the customers. This is in addition to managing the debtor administration and credit control processes of the company.

Some companies see it as a more attractive solution because it soles their problem on different levels.

Extended credit can make it difficult to operate a business. Luckily, there are various creative methods of dealing with late paying customers. All three types of invoice financing featured in this article are a viable way of dealing with extended credit.

They’re available to small and big businesses alike. However, each method is different and has its own advantages and disadvantages. It’s up to the business owner or manager to decide which method is best for their company. Hopefully, this articles has armed with the knowledge you need to make an informed choice for your company.